Sunday, April 5, 2009

Thoughts On Economic Optimalism

Optimalism - an economic theory presented by Giuseppe Gori, the leader of the Family Coalition Party of Ontario, is a new approach to government, based on facts, science, logic, experience and truth, for the optimal benefit of the governed. It's a middle-ground concept, that guarantees the highest possible funding for social programs and a required level of investment, while maintaining the lowest possible taxation level and a limit to the growth of government.

The key principle is that the relationship between taxation level and government revenues is not linear; there is an optimum level of taxation, at which government revenues reach their maximum. Exceeding that optimum point burdens individuals and businesses, impedes economic growth and results in loss of government revenue on the long run. On the contrary, adhering to the optimum level and maximizing the revenues without pressuring the economy, will produce a compounding effect for both on the long run, allowing the society to prosper and producing greater revenues for the government.

As a protective measure against partisanship, the optimum level is to be determined by independent economists, not by politicians. Another protective measure would compel the governments to outline spending as percentages of the actual revenues, rather than as plain numbers. Political parties would maintain their ability to prioritize spending in the areas of their choice, but instead of "so many billions for healthcare over the next 25 years", it will be "removing 1.2% from arts and 2.8% from foreign aid and transferring those 4% to healthcare". And, since the maximum is always 100%, that would leave no room for deficit financing.

While Giuseppe Gori regards Optimalism as a middle ground between socialist and libertarian / non-interventionalist positions, Optimalism, as outlined in the book, leans more towards economic libertarianism: allowing more economic freedom for businesses (government can set the standards but cannot punish industries with taxation,) allowing private sector to compete with government monopolies, disallowing the government from borrowing or printing money to provide what is commonly referred to as "stimulus" spending, replacing all existing taxes (on income, dividends, capital gains, real estate etc) with just one single tax which would be a Value Added Tax...

Well, that must be long-term prospective. Even if we can confine government revenues and program spending within the optimum percentage point of the GDP - it will probably take decades for the compounding effect to raise families' disposable income to such level, that all the social services that we cherish so much nowadays, start falling out of use.

Same when it comes to replacing all the taxes with a single Value Added Tax. Each percentage point of the existing Goods and Services Tax brings in revenue of ~0.33% of the GDP. HST Provinces which don't match the Federal GST credit, manage to raise about 0.4 to 0.45% of the GDP for each percentage point. Thus - unless the VAT is made more broad-based (the latter would mean taxing groceries, rent, equipment and raw material purchases for businesses etc) - raising the optimum amount would require 40% to 70% VAT. Or, if we make it a hidden tax, posting all prices "tax included", then a $100 out of pocket expense would include a $29 tax on a $71 purchase, if not a $41 tax on a $59 purchase. That would be just too high. So, most likely, some income and excise taxes will have to be maintained even on a longer run.

Moreover - achieving the optimum level of taxation - that alone will take many years to achieve. Number-wise, the optimum point percentage could be between 16% and 23% of the GDP, depending on the nation's economic performance and the standards of living. Compared to the actual level of taxation in Canada (33.3%) that actually means that we're taxed if not double then at least 50% above the optimum level. So we need to slash at least 10 percentage points of government spending (federal, provincial and municipal combined) just so that taxes don't overburden the economy and don't impede decent growth levels.

How long will it take to achieve such a cut when we have deficits at both federal and provincial level, when public debt is growing and the largest government expenditure is interest payments? Even if the books are balanced in 3 years (which is unlikely) and then all three levels of government start bringing their spending under control and consolidating their debts to achieve a combined reduction of 1% a year (which is even less likely) - even then, the optimum percentage point won't be achieved until 2022...

But here's something that could be implemented right away: have the government officials' wages pegged to the average private sector wage, at a certain ratio. That would not only eliminate the ever repeating votes on raising MPs' salaries but could also be used as a way to resolve labor disputes in the public sector. Depending on the position, skills and experience, a salary of each civil servant could be set to, let's say 75% to 150% of an average wage in the private sector. So it will be up to the actual job market conditions to determine whether public employees should be getting a raise or a pay cut. Too bad, the government missed out on the opportunity to include a proposal like that in the budget. That could have been a great first step towards Economic Optimalism.

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